A unique set of rules has developed with respect to contracts which propose to reduce or eliminate claims for incentives and similar sums attributable to the notice period. This is distinct from the rules on contracting out of the common law generally, as discussed here.

General Principles

The Supreme Court in Matthews affirmed that the correct approach to consider the plaintiff’s claim is as follows: ¹

1. First, determine whether the sum claimed would have reasonably followed, had the plaintiff been provided fair notice;
2. Secondly, if so, consider whether the constitutional documents, such as the employment contract, or the bonus plan, unambiguously take away or otherwise limit this claim.

This is, of course, not new. This has been the analysis taken for decades.

In assessing the first question, if there is doubt established about whether a discretionary bonus or similar entitlement would have followed in the notice period, then the issue of the “integral test” will apply. The theory of this test is to determine whether or not, the claimed sum was “integral” to the compensation of the plaintiff. It is of no consequence if the bonus sum is not paid annually, but rather accrued annually. ²

If the opposite is true, where there is no such doubt, this issue of the “integral test” will not be required. ³

If the sum claim is found to be integral to the compensation scheme, the employee must yet prove that, given fair notice, they would have earned such sum in this period. The Court of Appeal, in its June 2021 decision in Manastersky, noted that this is often done by pointing to the history of payment, such as, payment of annual performance bonuses.

The terms of the governing documents, if applicable, must be reviewed to determine whether the employee would likely have met any criteria which had been set out for entitlement. This will be a factual determination in each instance.

In the Matthews case, there was no doubt that the incentive claim fell due within the notice period. The sum claimed was not discretionary. The only issue for debate in this case was whether the terms of the LTIP unambiguously limited or disqualified Matthews’ right to receive this payment.

On this subject, the Supreme Court concluded that to do so, the language of the plan must unambiguously limit or remove the employee’s common law rights ⁴ and that such a term “must be absolutely clear and unambiguous”. This was so, as in Matthews and likely most such incentive plans, the bonus scheme is one not freely negotiated but rather set out in a “unilateral contract”. Such a clause in this context which limits or excludes liability must be subject to the principle of contractual interpretation that such clauses will be “strictly construed”, a concept which applies with “particular force” in this context.

Terms in the plan document requiring “active employment” or that there be “full-time” employment to qualify for such an incentive payment would not meet this test. Similarly, where the clause asserts the right to remove such a claim “with or without cause” will not exempt the claim.

In the Ontario Court of Appeal decision in Manastersky, there was a term in the incentive plan which gave to the employer the right to discontinue the fund which allowed for the bonus sum. It did so during the common law notice period. The employer argued successfully that it had the right to do so, and further, that it could so without substituting, in exchange, a comparable benefit.

The issue became whether this claim was “fund specific” and if not, should he then be entitled to a comparable claim. The majority in the Court of Appeal determined that this issue was specific to this particular fund and once this was wound up, so was any further claim.  The answer was no.

The dissenting reasons of Feldman, J.A. noted that if this benefit was an integral part of his compensation, the issue will be whether Matthews should then be entitled to an equivalent sum, once wound up.

The dissent noted that there were no terms in the document which unambiguously stated that should the company terminate the CIP, the consequence would be an end of such compensation. The reasons continued to state that just as such clear and unequivocal language be required to remove the entitlement under step 2 of the analysis, then the same test should be applied to altering the “integral test” of part 1.

The dissent, accordingly, would have denied the employer the right to change the incentive terms within the notice period, as it purported to do:

In this case, there is no language that purports to reduce the appellant’s compensation if the CIP is discontinued (step one), or to limit the appellant’s entitlement because of his dismissal (step two). The language that my colleague focuses on is the right of the respondent to discontinue the plan. That right is merely the right of any business to make business decisions in its own interest. It is not an unambiguous right to also reduce the appellant’s compensation, either while he remains employed or is in the reasonable notice period following the termination of his employment.

A good example of a case applying the test set out in Matthews is seen in an Ontario case decided in November of 2023. ⁵ The words governing entitlement to the bonus required that the plaintiff be employed when the bonus was awarded. It also proposed to disqualify bonus payments where "your employment ends for any reason, whether with or without cause". This language was found to be ineffective in denying the bonus for the notice period. The document failed to unambiguously remove the entitlement to the bonus sum as required by the Supreme Court in Matthews.

A similar conclusion was reached by the Ontario Court of Appeal in October of 2023. ⁶ The claim had been made by the plaintiff for the value of restricted stock units in the notice period. The document dealing with this issue read as follows:

Termination of Employment

For the purposes of the Plan and this Agreement, you shall be considered to be terminated from your employment with IBM or its affiliate on the later of the following dates:

1. The date you cease to provide services to the employer or any affiliated company, regardless of whether such date is the last date upon which the employer is required by common law, agreement, policy, or otherwise to pay you termination pay in lieu of notice of termination of employment; or

2. The date upon which the employer is required by statute (i.e. applicable provincial employment/labour standards legislation) to pay you termination pay in lieu of notice of termination of your employment.

The motions judge applied the above test and concluded that the plan document was ambiguous, a conclusion with which the Court of Appeal agreed:

The inclusion of the phrase “regardless of whether such date” in subsection (a) created uncertainty about when an employee becomes ineligible to participate in the Equity Award and leaves available a reasonable interpretation that eligibility is not extinguished until the end of the notice period at common law.

A further decision of the Ontario Superior Court considered a similar claim in January of 2024. The issue involved the plaintiff's entitlement to what was referred to as the BSA program during the notice period. ^{7 8}

The court determined that the first step of the analysis was met. The trial judge also found that the wording of the plan failed to remove her right to claim such a benefit during the notice period. The exclusionary words in this instance were as follows: ⁹

IA who has been terminated, with or without cause, whether or not working notice or payment in lieu of notice termination and/or severance has been offered to the IA

The claim failed for other reasons. The plan required that the plaintiff retire to claim this benefit which was found to have been lacking.

ESA Compliance

None of these cases have, to date, directly considered the issue of the need for such a clause to continue all "regular wages" for the statutory notice period. The definition of "regular wages" and "wages" and the need to continue this sum for the ESA statutory benefit is set out here. Given that the compensation is "integral" to satisfy the first step, one would expect that such must also be continued for the ESA period. There is no discussion of the consequences of the failure to address this issue in this context.

There, however, is one case which is not particularly helpful in a case dealing with stock options.

The only case to deal with this argument, in which the submission was rejected, was Buchanan v Geotel. There was no rationale offered to support the conclusion, which was somewhat terse:

They ¹⁰ contend that the Employment Standards Act of Ontario does not give Mr. Buchanan any right to claim damages relating to the stock option agreement. I agree.

The Buchanan decision was using the earlier version of the ESA, which, however, contained the same wording on this issue. Buchanan was successful in his claim for other reasons and accordingly the ESA argument was of no moment to the case. The decision  remains obiter.

The 2023 Ontario Court of Appeal decision, referenced above, did examine a termination provision for restricted stock units which did allow for the statutory period to extend the plaintiff's period of eligibility. ¹¹ The words were as follows:

Termination of Employment

For the purposes of the Plan and this Agreement, you shall be considered to be terminated from your employment with IBM or its affiliate on the later of the following dates:

a. The date you cease to provide services to the employer or any affiliated company, regardless of whether such date is the last date upon which the employer is required by common law, agreement, policy, or otherwise to pay you termination pay in lieu of notice of termination of employment; or

b. The date upon which the employer is required by statute (i.e. applicable provincial employment/labour standards legislation) to pay you termination pay in lieu of notice of termination of your employment.

The Court found that the language failed to meet the test of clarity as set out in Matthews and that this clause was thus enforceable to limit this claim.

Incentive Compensation or Dividends?

An important distinction will be drawn between additional compensation paid due to employment status as opposed to that as a shareholder. Should the payments be found to have been made due to the status as a shareholder, there will be no claim for the loss of such sum attributable to the notice period. Such was the finding in a 2021 Ontario decision. ¹² The plaintiff also submitted that once the company had been sold, which gave rise to the loss of further profit distribution to the shareholders, the company was obliged to provide some form of replacement compensation. This argument was not successful.